Are high home prices in Silicon Valley stifling start ups?

Many new companies form in Silicon Valley because they gain access to capital and a large well-trained workforce. But high housing costs forces wages up to attract talent, raising the start-up costs, and reducing the number of start-ups funded.

Many entrepreneurs with great ideas for new businesses flock to Silicon Valley, the largest incubator of start-ups in the country. Many wealthy investors and funds with the specialized expertise to identify and nurture start-ups live and work in Silicon Valley, so entrepreneurs looking to start new ventures go where the money is.

Once these start-ups secure funding, they must execute their business plans. Just as the entrepreneurs flock to Silicon Valley, the influx of venture capital draws workers with the unique skills necessary to make start-ups successful. This creates a critical mass of money and talent necessary to propel new businesses forward.

While the venture capital money appears to flow freely from those on the outside, these investors aren’t foolish, and they want to invest as little as possible into new companies that may fail to produce anything of value. The less money investors must fund to incubate a start-up, the more likely they are to fund the deal.

One of the largest costs of most start-ups is labor. And labor in Silicon Valley is expensive — expensive because it must be in order to pay the ridiculous cost of housing in the Bay Area. Of course, this becomes a self-fueling cycle as each new, highly-paid employee bids up the price of the scarce housing stock for everyone else. Due to the shortage of housing, rising salaries initiate an arms race, which in turn fuels an arms race in housing with the real winners being owners of existing housing stock.

As this self-fueling cycle moves forward, each time a venture capital fund reviews another start-up budget, the salaries go up and up and up. The start-up costs rise to the point that many viable start-ups don’t get funded because the business can’t incubate in the hostile housing environment.

The Bay Area’s wages are getting higher, far outpacing most of the country, but more residents are finding their paychecks can’t keep up with the region’s skyrocketing cost of living.

The typical Silicon Valley income — well over $100,000 annually — is now double the national average, according to a Bay Area News Group analysis of ten years of federal data. But while pay here is soaring, the cost of housing is rising even faster.

If ten workers compete for five houses, house prices and rents will rise as fast as the wages of the five highest paid workers in the group. No matter how fast wages go up, housing costs will rise faster due to this persistent shortage of supply.

“We have a two-income family — we both make good money — but it seems like every month, the expenses keep rising,” said Nicole Tembrevilla, a recruiter for an East Bay tech company. Together, Tembrevilla and her husband, who own a home in San Ramon, make in the low $200,000 range.

“It’s hard to save money,” said Tembrevilla, who lives in San Ramon with her husband and two children, one in high school and the other in middle school. “It’s home improvements, the car, car insurance, tuition — it’s overwhelming. And we’re trying to save up for college.”

It’s hard to feel sorry for a family making over $200,000 per year. Listening to them whine about the high cost of living sounds like a bad joke, but in Silicon Valley, it’s a real problem.

Residents say the biggest obstacle to making ends meet is simple: The Bay Area’s mammoth home prices and soaring rents.

“I’m getting good pay raises, but you really have to make around $150,000 a year to be able to afford a house around here,” said Joseph Martin, of Mountain View, a systems administrator with a San Jose tech company. Martin says he makes in the high five-figure range. “The real question is, ‘How do you afford to find a place to live here?’”

Since California nimbys oppose all new housing developments, but politicians all embrace new commercial and office developments because they create new jobs and increase local tax revenues. Since our policies create jobs but no matching housing, the shortage of housing gets worse, and costs escalate out of control.

For those making below the average wage, owning a home is out of reach. They’re just trying to survive.

“We are just barely making ends meet,” said Zeyen, as she shopped at a San Jose thrift store. “The expenses here are a real eye-opener.” …

“It takes everything we have to pay the bills,” Zeyen said. “We moved here to make a better future for ourselves. It’s hard to say if it’s worth it.”

“The war for talent is driving all of this,” said Russell Hancock, president of Joint Venture Silicon Valley. “… The tech boom and wage growth have created a class of the uber-rich in the Bay Area.” …

Silicon Valley’s concentration of tech workers, with their top-flight paychecks, increases the chances that people will bid up housing values. …

The pattern of sharply rising wages in Silicon Valley is likely to persist, experts say.

“Demand for hiring is going to continue,” said Stephen Levy, director of the Palo Alto-based Center for Continuing Study of the California Economy. “And that will keep the upward pressure on wages in Silicon Valley.”

I wrote that chronic shortages of housing supply inflates California house prices. When there are more jobs than houses or rentals, people are forced to bid up house prices and rents in order to obtain housing. This forces people to substitute down in quality and move further away from job centers, and it prices out the lowest bracket of wage earners, forcing them to live with multiple families in the same house or put upwards of 50% of their income toward housing, lowering everyone’s standard of living. This downward substitution effect lifts house prices at every level of the housing ladder and prices out the lowest tier of the housing market.

This phenomenon has been going on for so long, that most Californians resign themselves to the idea of living in lesser quality housing than they could obtain elsewhere based on their income. The tipping point comes when businesses no longer want to play along. When businesses relocate — and take jobs with them — then California’s high house prices weaken the entire economy.

Is Silicon Valley in danger of losing it’s advantage as a tech incubator? If something isn’t done to alleviate the shortage of available housing, it will reach the tipping point where investors, businesses, and employers find it’s in their best interest to move elsewhere. It’s only a matter of time.

19 responses to “Are high home prices in Silicon Valley stifling start ups?”

The debate is winding down, so I wanted to give my impression before it gets tainted by the pundits’ spin.

First, each side will see what they want to see with regards to the performances of each candidate. I think they both looked strong and capable. Overall, I think Trump did more to improve his chances by his performance. That being said, Hillary looked strong too, and she did nothing to hurt her chances.

Second, Donald Trump is in his element when he is attacking. He’s animated, and he comes across as passionately believes in what he’s saying — even when what he’s saying is complete bullshit. He knows how to hammer home his point when he senses blood.

Third, Hillary comes across as strong and intelligent, but her performance is a bit stilted. I don’t think it hurts her as she needs to be that way to survive the onslaught from Trump’s attacks. Her zingers were too contrived to be really effective.

Fourth, I think most Republicans were worried that Trump might come across as a buffoon, and he didn’t. His command of the truth hasn’t improved any, but he lies with such gusto that people want to believe him. He came across as someone who could lead the country.

Fifth, I think Democrats worried Hillary might get too angry in response to Trump’s attacks, but she kept her cool pretty well. If she had wallowed in the mud with Trump, it would have played to his strengths.

I think the press will paint this as a close race just to keep people engaged. Any movement in the polls post-debate will be magnified in importance far beyond what it actually means. Realistically, Trump will be behind in the polls up through election day, but I also believe he will out-perform the polls when people actually vote.

Trump looked ok, not great but he didn’t destroy himself. Clinton looked good, she didn’t hurt herself one bit. Still 2 debates left but the race needs to be tight for him to have a chance, it will come down to swings States. Whoever can grab the majority of the 10-15% Indy vote in those States will win. There won’t be a big switch in votes right now, it comes down to those Indy people that will vote on the fly that day.

I agree with Larry and FutureBuyer. However, I think the “winner” was Hillary. In the end, I think she presents herself as more similar to what people expect to see in these debates. That will give some Americans more comfort. In a close race between two devils, the devil we know will win.

Trump could have been more prepared. Some pundits are saying no one will remember the 1st debate and it will come down to the last debate. Maybe Trump wants to save the attacks for then, I don’t know, but I do know that Trump was crying on twitter about the questions asked. If the questions weren’t suitable, then why not bring them up yourself? He had every opportunity to do so.

In the end, I still prefer him over her and not likely to change but it could for many independents.

Well, we get to hear about ‘Birtherism’ during the section on America’s Direction, and Trump’s unreleased ‘tax returns’ during the section on America’s Prosperity. Meanwhile, the candidate that exposed America’s top secrets to hackers and received donations from foreign powers in exchange for favors was not questioned about this at all during the section on America’s Role in the World.

That being said, I think Hillary won the debate based on traditional metrics. She had better answers and was more prepared. Yet, most debates get reduced down to a couple of key moments in our memories and I think Trump had the better zingers.

His promise to release his tax returns if she released the 33,000 deleted e-mails was golden. I also thought his line that ISIS was an infant while she was Secretary of State was a powerful reminder of Obama’s failures in foreign policy and stopping terrorism. He also called out her lie about opposing the TPP while referring to it as the ‘gold standard’ of trade deals before it became politically unpopular.

Lester Holt did a good job moderating but clearly had an anti-Trump agenda. He asked Trump 21 questions in total and Hillary only 8 questions. Also:

Five Times Lester Holt Shilled for Hillary Clinton at First Debate

Here are the five worst examples.

Tax returns. Holt never asked Clinton about her e-mail scandal, about Benghazi, or about the Clinton Foundation and its dubious dealings. But he did ask Trump about his tax returns, arguing — not asking — that there might be questionable information in them that the American public deserved to hear.

Birther conspiracy theory. Holt never asked Clinton about her past record of racist statements, including her “super-predator” remarks as First Lady, or her explicit appeal to “white Americans” in her 2008 primary campaign against Obama. Yet he asked Trump about the Birther conspiracy theory and cast it as racist.

Stop-and-frisk. After an exchange between the candidates over the policy of “stop-and-frisk,” Holt interjected to bolster Clinton’s point by stating, erroneously, that stop-and-frisk had ended in New York because it had been declared unconstitutional by a court. Trump countered, correctly, that the new mayor had canceled the policy before the litigation was over.

“A presidential look.” Towards the end of the debate, Holt asked Trump about what he meant by saying Hillary Clinton did not have “a presidential look.” He did so after noting that Clinton had become “the first woman” to be nominated for president by a major political party, thus setting Trump up as a sexist. As Trump answered, Holt interrupted him, then gave Clinton a chance to respond with her talking points about Trump’s past comments on women.

Iraq War. The question of whether Trump supported the Iraq War or not has been widely debated. What is beyond doubt is that Hillary Clinton voted for it. Holt only represented one side of the debate about Trump, and never asked Clinton about her own vote.

Good to see you post. I thought I might have lost you. I haven’t seen Perspective in several days.

The points in the article are correct. The Presidential Look question stood out to me as a setup, but I think Trump handled it well.

Where Holt didn’t go after Hillary, Trump certainly did. He hammered her, particularly on the email scandal. The promise to release his taxes if she releases the emails was classic. It should make that issue go away because now he has a standard answer he can lob out whenever he’s attacked.

Things are just a little busy for me on the home and work fronts, so my commenting might be a little sporadic for awhile. Perspective is still commenting on the TI presidential election thread, so presumably he finds that crowd to be more ‘reasonable’ when discussing politics. I think it bothers him that most of the commenters here are voting Trump.

I hope we don’t lose you and Perspective as readers and commenters. Now that I have access to more data and a plethora of new information, I should be able to move away from news reaction posts to more insightful analysis posts. I’m still digesting all the new information, and the first several months of the job will be hectic, but I am excited about the future of the site.

LOS ANGELES — The powerful economic resurgence that has swept Southern California is on display almost everywhere here, visible in the construction cranes towering on the skyline and the gush of applications to build luxury hotels, shopping centers, high-rise condominiums and acres of apartment complexes from Santa Monica to downtown Los Angeles.

But it can also be seen in a battle that has broken out about the fundamental nature of this distinctively low-lying and spread-out city. The conflict has pitted developers and some government officials against neighborhood organizations and preservationists. It is a debate about height and neighborhood character; the influence of big-money developers on City Hall; and, most of all, what Los Angeles should look like a generation from now.

This is a city that has long defied easy definition — at once urban, suburban and even rural — filled with people who live in homes with year-round gardens and open skies dotted by swaying palm trees, often blocks away from gritty boulevards, highways and clusters of office buildings. And it is no stranger to battles between entrenched neighborhood groups and well-financed developers seeing opportunity in a wealthy market; the slow-growth movement thrived here during the 1990s.

But the debate this time has reached a particularly pitched level, fueled by a severe shortage of affordable housing, an influx of people moving back into the city center and the perception that a Southern California city that once seemed to have unlimited space for growth has run out of track. “What’s that old cliché?” Mayor Eric M. Garcetti said in an interview. “The sprawl has hit the wall in L.A.”

“It’s not whether or not density is going to come,” he said. “It’s whether we plan for it or not. People are like, ‘Oh my God, this is L.A., and they are going tall?’ Height makes you think it’s more dense. And it doesn’t always compute that way. You have to convince people.”

Housing is one of the critical issues at hand in the upcoming U.S. presidential election, as both candidates, Hillary Clinton and Donald Trump, will make cases for their respective residential real estate and tax policies. Voters in red states and blue states will make their choices based on entirely different viewpoints.

Using research from Nielsen Demographics, Nielsen Scarborough, Nielsen Financial, and Politico, Realtor.com looked at housing data and demographics in Democratic states, Republican states, and swing states.

The analysis found that homes were larger and cheaper in the red states, which include the majority of the South and Midwest. Homeownership rates were also higher in these states. Blue states, which include California, the Pacific Northwest, and the East Coast, have a higher median household income and a greater share of households that earn more than $500,000.

Red states tend to be rural and blue states have most of the nation’s most populous cities.

“[The analysis] was a perfect statement of why there are such differences politically between red and blue states,” Realtor.com Chief Economist Jonathan Smoke says. “The way of life is clearly different between the two.”

* The Chinese real estate market shows the signs of both oversupply and irrational exuberance.

* Observers under-estimate the amount of control the Chinese Communist Party has over this market.

* The real estate market in tier 1 cities will not crash.

There is nothing better than a ‘sure-thing’ investment. The only hard part is finding one, and generally the only people who manage that have done something illegal or work in the government.

Sometimes, however, regular investors can add an extra layer of security to their investments by taking advantage of public policies and national security interests. Investing in industries that are considered too big to fail. U.S. investors can gain exposure to the Chinese real estate market with the Guggenheim China Real Estate ETF (NYSEARCA:TAO).

For the last five years the Chinese real estate market has been seen as a gigantic disaster waiting to happen. The provincial market shows obvious signs of oversupply while prices in the big cities rise to astronomical levels.

According to Forbes:

441 million square meters of gross floor area has been completed but still not sold as of November 2015, according to the National Bureau of Statistics of China.

There are reportedly 10 billion square feet of vacant homes in the country. 1 in 5 houses are unoccupied and the abundance of ghost cities is well known around the globe.

Ghost Cities

However, despite this oversupply in rural cities the market for real estate in Tier 1 cities in completely overheated. According to some Beijing residents, prices in the outskirts of the city can reach from $6500 to $8500 per square meter. Some cities have seen y/y price growth of over 50%.

looking at this situation we see an irony that would be quite hilarious if its implications were not so serious.

One one hand we see the heavy handed robotic production of communism stretched to a satirical level of absurdity. This is contrasted with the irrational exuberance of capitalism.

The world waited for the impending disaster… But it didn’t come.

Too Big to Fail.

As ridiculous as it may sound, Chinese real estate may be a sure thing investment and the long awaited crash may never come.

This is because real estate accounts for a whopping 15% of Chinese GDP, physical asset investment and a large portion of employment. Not only this, but it represents 74% of the average Chinese household wealth.

Needless to say, if we saw a serious crash in real estate it could very well lead to the overthrow of the Chinese Communist Party. The CCP won’t let that happen, and apparently investors know it – so they buy the sure thing investment.

It’s the Godzilla of Los Angeles developments — and it will loom especially large in the Arts District.
Developer SunCal has finally revealed its plan for the site it acquired last year on the corner of 6th and Alameda Streets. It calls for 1,736 units, two hotel towers, shops, creative offices and a school, as well as 23,000 additional square feet for art and two parks, the L.A. Times reported. The plan was informally introduced to city officials by the Orange County-based firm on Friday.

SunCal acquired the 14.5-acre site, which is currently occupied by two warehouses, for $130 million last March, and is partnering with a fund affiliated with Dell computers founder Michael Dell on the project, which is to be known as 6AM. It will be designed by architectural firm Herzog & de Mueron.

If it moves ahead, 6AM would add an entirely new community to a largely undeveloped enclave of the Arts District. This particular stretch of Alameda street is largely occupied by produce warehouses.

The plan is likely to draw opposition from some neighborhood activists, who may object to the height of the hotels, which are slated to top 58 stories, the Times speculated.

SunCal has yet to submit formal plans to the city, and would have to request a zoning change and General Plan amendment in order to proceed. SunCal is likely to be in a hurry, since the Neighborhood Integrity Initiative, if passed in in March, would impose a two-year moratorium on all developments that call for zoning changes.

“The height has not settled well with me, but as always, we’ll wait to hear from the community,” the district’s Councilmember Jose Huizar told the Times. He added that the rest of the project looks “spectacular.” [LAT] — Cathaleen Chen

Los Angeles Mayor Eric Garcetti has appeared with Jay Z to promote an open-air music festival, lit the façade of City Hall in purple to mark the death of Prince, and recorded an R&B video — the “101 Slow Jam” — to publicize the temporary closure of an overpass.

Yet the so-called “hipster mayor” has also made a name for himself as a budget cutter, a technocrat in the mold of former New York City Mayor Michael Bloomberg and a booster for new development.
Real estate professionals confirm that the development process has been more efficient under the mayor’s leadership. Among the key changes industry insiders point to is the parallel design permitting process, implemented just a few months after he took office in 2013. This policy allows developers to design projects and consult with the Building Department simultaneously. Christopher Martin, the architect behind the Wilshire Grand tower, told TRD that this single change had streamlined the planning process and “put it into a form that’s user-friendly and attractive to investors.”

But the mayor doesn’t intend to stop there. He wants to rip up the city’s zoning rulebook — the beating heart that sustains urban development — in order to facilitate more housing construction. He has called L.A.’s 35 community plans and the general plan outdated (no argument from developers, there) and created a program to overhaul them in the next decade.

As a stalwart pragmatist, Garcetti now says that moving the city forward isn’t about environmental policy or economic policy, but about cooperation. Yet some critics argue that he’s bending too far in the direction of high-density development — although he’s widely viewed as a liberal Democrat — and some progressives are pushing back through the ballot box.

Two initiatives that could potentially shake up the development process by putting new restrictions on large-scale projects are heading to voters. The Build Better L.A. initiative would require more affordable housing in large multi-family projects, while the Neighborhood Integrity Initiative would mandate a two-year pause on projects requiring zoning amendments.

The new home sales report for August was strong at 609,000 on a seasonally adjusted annual rate basis (SAAR) – the highest for the month of August since 2007 – and the second highest sales rate since January 2008 (only last month was higher). However combined sales for May, June and July were revised down slightly.

Sales were up 20.6% year-over-year (YoY) compared to August 2015. And sales are up 13.3% year-to-date compared to the same period in 2015.

This is very solid year-over-year growth. And new home sales are much more important for jobs and the economy than existing home sales. Since existing sales are existing stock, the only direct contribution to GDP is the broker’s commission. There is usually some additional spending with an existing home purchase – new furniture, etc – but overall the economic impact is small compared to a new home sale.

If they lose critical mass to another location, it will mark the beginning of the end for growth in the Valley. Right now, Silicon Valley doesn’t have many competing locations where there are enough potential employees and money to get off the ground. Places like Santa Monica that are trying to compete have the same problem with high house prices and a shortage of demand. Places like Pittsburg or Austin don’t have enough venture capital money or enough qualified employees yet to be serious competition. But if Silicon Valley doesn’t solve it’s housing problems, it’s only a matter of time before this business moves elsewhere.